[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.672(a)-1]

[Page 284-285]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.672(a)-1  Definition of adverse party.

    (a) Under section 672(a) an adverse party is defined as any person 
having a substantial beneficial interest in a trust which would be 
adversely affected by the exercise or nonexercise of a power which he 
possesses respecting the trust. A trustee is not an adverse party merely 
because of his interest as trustee. A person having a general power of 
appointment over the trust property is deemed to have a beneficial 
interest in the trust. An interest is a substantial interest if its 
value in relation to the total value of the property subject to the 
power is not insignificant.
    (b) Ordinarily, a beneficiary will be an adverse party, but if his 
right to share in the income or corpus of a trust is limited to only a 
part, he may be an adverse party only as to that part. Thus, if A, B, C, 
and D are equal income beneficiaries of a trust and the grantor can 
revoke with A's consent, the grantor is treated as the owner of a 
portion which represents three-fourths of the trust; and items of 
income, deduction, and credit attributable to that portion are included 
in determining the tax of the grantor.
    (c) The interest of an ordinary income beneficiary of a trust may or 
may not be adverse with respect to the exercise of a power over corpus. 
Thus, if the income of a trust is payable to A for life, with a power 
(which is not a general power of appointment) in A to appoint the corpus 
to the grantor either during his life or by will, A's interest is 
adverse to the return of the corpus to

[[Page 285]]

the grantor during A's life, but is not adverse to a return of the 
corpus after A's death. In other words, A's interest is adverse as to 
ordinary income but is not adverse as to income allocable to corpus. 
Therefore, assuming no other relevant facts exist, the grantor would not 
be taxable on the ordinary income of the trust under section 674, 676, 
or 677, but would be taxable under section 677 on income allocable to 
corpus (such as capital gains), since it may in the discretion of a 
nonadverse party be accumulated for future distribution to the grantor. 
Similarly, the interest of a contingent income beneficiary is adverse to 
a return of corpus to the grantor before the termination of his interest 
but not to a return of corpus after the termination of his interest.
    (d) The interest of a remainderman is adverse to the exercise of any 
power over the corpus of a trust, but not to the exercise of a power 
over any income interest preceding his remainder. For example, if the 
grantor creates a trust which provides for income to be distributed to A 
for 10 years and then for the corpus to go to X if he is then living, a 
power exercisable by X to revest corpus in the grantor is a power 
exercisable by an adverse party; however, a power exercisable by X to 
distribute part or all of the ordinary income to the grantor may be a 
power exercisable by a nonadverse party (which would cause the ordinary 
income to be taxed to the grantor).